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Family. It is one of the distinguishing characteristics of the wine business, at least according to some scholars. But today’s news from Vinum Capital LLC makes we wonder about the future of the family winery business model.

Family businesses are supposed to be disadvantaged in the big time business world. Their family-ownership structure is supposed to limit access to capital and make expansion and effective management difficult. And yet some of the most famous names in the wine industry are family-owned firms. Some, like the Gallos of California, have kept ownership closely held for years. Others, like the Antinori of Italy, have experimented with outside capital only to return, at considerable expense, to the family model. Still others, like the Mondavi, illustrate just about everything — the problems of family businesses (the family feud that caused Robert Mondavi to strike out on his own), the benefits of family business (the rise of the Robert Mondavi brand) and problems of taking a family business public (the eventually takeover by Constellation brands).

All in the Family

Why does family ownership seem to be an advantage in wine where it is seen as a disadvantage almost everywhere else? One theory is that it is all about trust. Family firms are forward-looking high-trust environments where long term relationships can grow. The wine industry, people say, uniquely benefits from the long term commitment and close trusting relationships (with correspondingly low transactions costs) that family relations can provide.

It is said that the success of [Yellow Tail] wine is due to the fact that the Casella family (Australian winegrowers) and the Deutsch family (American distributors) were able to work together effectively to promote the brand because both sides of the deal were high-trust family firms. I am not sure how much faith to put in this idea (economists are trained to be suspicious of “cultural” explanations of economic outcomes), but I recall that Steve Smith, the celebrated New Zealand winemaker I interviewed a few years ago, felt it was very important for his family-owned business (Craggy Range — owned by the Peabody family) to work mainly with family-owned distributors in export markets. Smith is smart, so maybe there is something to this family business thing.

But the family-owned wine business may be an endangered species according to a recent study by Silicon Valley Bank, a major wine industry financial institution. They report that as many as 51% of these family wineries (in the western U.S.) will likely be up for sale in the next decade as the founding generation retires and is not replace by younger blood. One limitation of the family business model is that it only works if generations of family members want to run the business. Wine is glamorous but hard work, so it is perhaps not surprising that heirs might prefer cash.

A New Business Model

Vinum Capital has established a $250-million private equity fund (Vinum Capital Partners I LP) to acquire certain family wineries as they come on the market, invest in them so that they grow to be large enough to be of interest to larger firms (Constellation Brands?) and then sell them at a profit. The basic business model is shown in the image above.

“Our objective is to help provide liquidity for family-owned businesses,” according to Vinum’s press release, “Many of them have been in business for 20 to 40 years and there may not be a second generation willing or able to take on the business.” Large wine companies are interested in operations that produce at least 300,000 cases per year, according to Vinum, which sees itself as being able to muster the resources to get some family-owned firms to that level.

The fund’s managers certainly have a lot of experience, both with family businesses and at the corporate wine level, so maybe this is a good business plan. I know that a number of high-profile family wineries have recently “transitioned” to corporate control including Erath in Oregon, purchase by Ste Michelle Wine Estates and Stag’s Leap in Napa Valley, sold to a Ste Michelle – Antinori partnership.

A Natural Experiment

I’m pretty interested to see what happens because I view this as a natural experiment. Vinum’s plan will work best if people are wrong about family wineries — if the particular advantages of the family form of business organization are not really important factors in winery success after all (or if they lose their effectiveness above a certain scale). If the plan works it might mean that wine is doing more than passing from one generation to the next — perhaps it is transitioning from a special type of business where long run relationships and trust are key to one where traditional business factors such as economies of scale, distributional effcieincy and brand strength matter more. Stay tuned for the results!

People turn to wine critics to tell them what’s really inside that expensive bottle (or that cheap one) and how various wines compare. Some critics are famous for their detailed wine tasting notes (Michael Broadbent comes to mind here) that provide comprehensive qualitative evaluation of wines, but with so many choices in today’s global market it is almost inevitable that quantitative rating scales would evolve. They simplify wine evaluation, which is what many consumers are looking for, but they have complicated matters, too, because there is no single accepted system to provide the rankings.

I’m interested in the variety of wine rating systems and scales that wine critics employ and the controversies that surround them. This blog entry is a intended to be a brief guide for the perplexed, an analysis of the practical and theoretical difficulties of making and using wine ranking systems.

Wine Rating Scales: 100-points, 20-points, Three Glasses and More

The first problem is that different wine critic publications use different techniques to evaluate wine and different rating scales to compare them. Click on this image to see a useful comparison of wine rating systems compiled by De Long Wine(click here to download the pdf version, which is easier to read).

Robert Parker’s Wine Advocate, the Wine Spectator and Wine Enthusiast all use a 100-point rating scale, although the qualitative meanings associated with the numbers are not exactly the same. It is perhaps not an accident that these are all American publications and that American wine readers are familiar with 100-point ratings from their high school and college classes.

In theory a 100-point system allows wine critics to be very precise in their relative ratings (a 85-point syrah really is better than an 84-point syrah) although in practice many consumers may not be able to appreciate the distinction. Significantly, it is not really a 100-point scale since 50 points is functionally the lowest grade and it is rare to see wines rated for scores lower than 70, so the scale is not really as precise as it might seem. ( Any professor or teacher will tell you, there has been both grade inflation and grade compression in recent years and this applies to wine critics too, I believe.)

The 100-point scale is far from universal. The enologists at the University of California at Davis use a 20-point rating scale, as does British wine critic Jancis Robinson and Decanter, the leading global wine magazine. The 20-point scale actually corresponds to how students are graded in French high schools and universities, so perhaps that says something about its origins.

The Davis 20-point scale gives up to 4 points for appearance, 6 points for smell, 8 points for taste and 2 for overall harmony, according to my copy of The Taste of Wine by Emile Peynaud. The Office International du Vin’s 20-point scale has different relative weights for wine qualities; it awards 4 points for appearance, 4 for smell and 12 for taste. Oz Clarke’s 20 point system assigns 2, 6 and 12 points for look, smell and taste. It’s easy to understand how the same wine can receive different scores when different critics used different criteria and different weights.

A 20-point scale (which is often really a 10-point scale) offers less precision in relative rankings, since only whole and half point ratings are available, but this may be appropriate depending upon how the ratings are to be used. Wines rated 85, 86 and 87 on a 100-point scale, for example, might all receive scores of about 16 on a 20 point scale. It’s up to you to decide if the finer evaluative grid provides useful information.

Decanter uses both a 20-point scale and as well as simple guide of zero to five stars to rate wines, where one star is “acceptable”, two is quite good, three is recommended, four is highly recommended and five is, well I suppose an American would say awesome, but the British are more reserved. Dorothy J. Gaiter and John Brecher (who write an influential wine column for the Wall Street Journal) also use a five point system; they rates wines from OK to Good, Very Good, Delicious and Delicious(!).

The five point system allows for less precision but it is still very useful – it is the system commonly used to rate hotels and resorts, for example. ViniD’Italia, the Italian wine guide published by Gambero Rosso, uses a three-glasses scale that will be familiar to European consumers who use the Michelin Guide’s three-star scale to rate restaurants.

Which System if Best?

It is natural to think that the best system is the one that provides the most information, so a 100-point scale must be best, but I’m not sure that’s true. Emile Peynaud makes the point that how you go about tasting and evaluating wine is different depending upon your purpose. Critical wine evaluation to uncover the flaws in wine (to advise a winemaker, for example) is different in his book from commercial tasting (as the basis for ordering wine for a restaurant or wine distributor or perhaps buying wine as an investment) which is different consumer tasting to see what you like.

Many will disagree, but it seems to me that the simple three or five stars/glasses/points systems are probably adequate for consumer tasting use while the 20- and 100-point scales are better suited for commercial purposes. I’m not sure that numbers or stars are useful at all for critical wine evaluation – for that you need Broadbent’s detailed qualitative notes. Wine critic publications often try to serve all three of these markets, which may explain why they use the most detailed systems or use a dual system like Decanter.

In any case, however, it seems to me that greater transparency would be useful. First, it is important that the criteria and weights are highlighted and not buried in footnotes. And I don’t see why a 20-point rating couldn’t be disaggregated like this: 15 (3/6/6) for a 20-point system that gives up to 4 points for appearance, 6 for smell and 10 for taste. That would tell me quickly how this wine differs from a 15 (4/3/8). Depending upon how much I value aroma in a wine and what type of wine it is, I might prefer the first “15” wine to the second.

Wine and Figure Skating?

So far I’ve focused on the practical problems associated with having different evaluation scales with different weights for different purposes, but there are even more serious difficulties in wine rating scales. In economics we learn that numerical measures are either cardinal or ordinal. Cardinal measures have constant units of measurment that can be compared and manipulated mathematically with ease. Weight (measured by a scale) and length (measured in feet or meters) are cardinal measures. Every kilogram or kilometer is the same.

Ordinal measures are different – they provide only a rank ordering. If I asked you to rate three wines from your most preferred to your least favorite, for example, that would be an ordinal ranking. You and I might agree about the order (rating wines A over C over B, for example), but we might disagree about how muchbetter A was compared to C. I might think it was a little better, but for you the difference could be profound.

To use a familiar example from sports, they give the Olympic gold medal in the long jump based upon a cardinal measure of performance (length of jump) and they give the gold medal in figure skating based upon ordinal judges’ scores, which are relative not absolute measures of performance (in the U.S. they actually call the judges’ scores “ordinals”). Figure skating ratings are controversial for the same reason wine scores are.

So what kind of judgment do we make when we taste wine — do we evaluate against an absolute standard like in the long jump or a relative one like the figure skating judges? The answer is both, but in different proportions. An expert taster will have an exact idea of what a wine should be and can rate accordingly, but you and I might only be able to rank order different wines, since our abilities to make absolute judgements aren’t well developed.

This is one reason why multi-wine social blind tasting parties almost always produce unexpected winners or favorites. The wines we like better [relative] are not always the ones we like best [absolute] when evaluated on their own.

Ordinal and cardinal are just different, like apples and oranges (or Pinot Gris and Chardonnay). Imagine what the long jump would look like if ordinal “style points” were awarded? Imagine what figure skating would look like if the jumps and throws were rated by cardinal measures distance and hang time? No, it wouldn’t be a pretty sight.

Economists are taught that it is a mistake to treat ordinal rankings as if they are cardinal rankings, but that’s what I think we wine folks do sometimes. I’ve read than Jancis Robinson, who studied Mathematics at Oxford, isn’t entirely comfortable with numeric wine ratings. Perhaps it is because she appreciates this methodological difficulty.

Lessons of the Judgment of Paris

Or maybe she’s just smart. Smart enough to know that your 18-point wine may be my 14-pointer. It’s clear that people approach wine with different tastes, tasting skills, expectations and even different taste buds, so relative rankings by one person need not be shared by others. This is true of even professional tasters, as the Judgment of Paris made clear.

The Judgment of Paris (the topic of a great book by George M. Taber – see below – and two questionable forthcoming films) was a 1976 blind tasting of French versus American wines organized (in Paris, of course) by Steven Spurrier. It became famous because a panel of French wine experts found to their surprise that American wines were as good as or even better than prestigious wines from French.

A recent article by Dennis Lindley (professor emeritus at University College London – see below) casts doubt on this conclusion, however. Read the article for the full analysis, but for now just click on the image above to see the actual scores of the 11 judges. It doesn’t take much effort to see that these experts disagreed as much as they agreed about the quality of the wines they tasted. The 1971 Mayacamas Cabernet, for example, received scores as low as 3 and 5 on a 20-point scale along with ratings as high as 12, 13 and 14. It was simultaneous undrinkable (according to a famous sommelier) and pretty darn good (according to the owner of a famous wine property). If the experts don’t agree with each other, what is the chance that you will agree with them?

Does this mean that wine critics and their rating systems are useless and should disappear? Not likely. Wine ratings are useful to consumers, who face an enormous range of choices and desperately need information, even if it is practically problematic and theoretically suspect. Wine ratings are useful commercially, too. Winemakers need to find ways to reduce consumer uncertainty and therefore increase sales and wine ratings serve that purpose.

And then, of course, there is the wine critic industry itself, which knows that ratings sell magazines and drive advertising. Wine ratings are here to stay. We just need to understand them better and use them more effectively.

Europe is afloat in a sea of bad wine and the European Union agriculture ministers agreed last week to do something about it. But is it too little and too late?

Marian Fischer Boel, the EU Agriculture Minister, proposed a number of fairly radical reforms in 2006 and these were the basis of the discussion. She wanted an immediate end to distillation subsidies and a vast program to encourage small winegrowers to pull up their vines — one million acres — replacing them with other crops or, in some cases, with more marketable grape varieties. Perhaps predictably, the policies agreed last week are much weaker than the original proposals. Distillation subsidies will be phased out over five years and as many as 400,000 acres of vines will be “grubbed up.” Four hundred thousand acres seems like a lot, but given the size of the problem is it, as Wine Spectator reported, just “a good start?”

Current EU policies are as useless as the old wine barrels shown above. At the top end of the market, national and EU policies tend to stifle innovation and prevent effective market adjustment (the counter argument is that they preserve tradition and prevent destructive commercialization). I have read any number of stories about high end European winemakers who have expanded abroad in part to escape regulations on what they can produce, where, and how they can market it.

In the mid-market, where current attention is focused, EU and national regulations seem to prevent winemakers from achieving the transparency that an increasing global market requires. It is hard enough to know what’s in a bottle of wine without the complicated rules that government European wine labeling. French wines are typically “branded” by place of origin, not grape varietal, for example. Buyers who are not confident about their French geographical knowledge and the relationship between place, grape variety and wine style, are likely to choose New World wines with more easily understood characteristics. Australian wines sell well in France partly for this reason.

At the low end of the market, EU policies designed to support farm incomes have produced the famous “wine lake.” Each year the EU spends about $2 billion to buy up unsold wines and turn them into industrial alcohol. This vast reliable market for poor quality wine keeps thousands of small scale producers in business. The distillation subsidy insulates low-end producers from market forces with the result that the vineyards remain uneconomically small, the practices favor quantity over quality, and the wine, while it may reflect local tradition, finds few buyers in the marketplace. Cheap New World wine is preferred to bad Old World plonk.

The new EU policies are designed to drain the wine lake by making the wine sector more responsive to market forces. Label laws and regulations will be reformed so that European wines can be sold by regional and grape varietal just like New World wines. The distillation subsidy will be phased out over four years, with some of the subsidy funds returned to regional groups to be used in wine marketing and promotion efforts. And up to 400,000 acres of vineyards will be included in the new “vine-pull scheme.” New plantings will be allowed over time, but they will be market-driven not subsidy-driven.

The top end of the market is unlikely to be affected very much by these policies, since by definition they already have established brands and distribution channels. New label laws and subsidy reductions will have few direct effects on these producers, although they may be able to gain indirectly as vineyard consolidation takes place and Australian-style brands grow in importance. I predict that the most visible early effect of the new rules will be expansion of European brands both at home and in export markets.

The clear gainers are the mid-market producers — the wines that sell for about $12. There is great potential profit in this part of the market, which is expanding rapidly in the New World. Freed from the constraints of tradition, European winemakers should be able to compete in this market quite well. It is, however, a hotly contested market segment. European producers will need to use their new freedom well to succeed and those who choose not to adjust may suffer as the European market realigns itself.

The real problem is at the bottom of the market. Losing the distillation subsidies will hurt many producers and I don’t know how enough about the cost-benefit of the vine-pulling schemes to comment. Pulling 400,000 acres out of wine production should help stabilize the market by reducing the annual surplus, but I don’t know if it is enough and I don’t know if the incentives provided are strong enough.

Four hundred thousand acres — how big is that? Huge if you are thinking New World — Australia had just 388,000 acres of vineyards altogether in 2003 according to my Oxford Companion. But tiny if you think Old World — and of course this is an Old World problem. Italy and France had more than 2 million acres of vines each in 2003 and France had nearly 3 million more. (The Languedoc region in the south of France has 528,000 acres by itself.) Taking 400,000 acres out of production in Europe is like removing Moldova and Switzerland from the market. The effect on the regions where the vines are grubbed up will be large, but the impact on the global market is likely to be quite small — reducing the global surplus, but not eliminating it. I don’t know if it will be enough.

Will it work? Much of the discussion that I have read focuses on the size of the vine-pull scheme — 400,000 acres versus the million acres that Marian Fischer Boel proposed two years ago. Although I think the size of the grubbing up program is important, I believe that the market-driven reforms and the elimination of distillation subsidies are more important. The 1988 vine-pull scheme took over a million acres out of production but, as we see today, didn’t eliminate the surplus because of the difficulty of selling the good wines and the incentives to keep make bad ones.

You may or may not be surprised to learn that there is an organization called the American Association of Wine Economists. It’s headquarters are at Whitman College in Walla Walla, Washington, where Karl Storchmann teaches wine economics.

The Association publishes the Journal of Wine Economics, which features interesting articles covering a range of wine economics topics under the direction of a most distinguished editorial board: Kym Anderson (University of Adelaide and World Bank), Orley Ashenfelter (Princeton), Victor Ginsburgh ( Université Libre de Bruxelles), Robert N. Stavins (Kennedy School of Government, Harvard) and of course Karl Storchmann.

The Association’s first annual meeting took place last year in Trier, Germany (click to view a pdf of the conference program). Karl aims to bring the meeting to Portland, Oregon this summer, probably in mid-August. Check out the links to the Association and the Journal if you are interested in how economists apply their technical tools to the analysis of wine markets.

I teach at the University of Puget Sound, one of the northwest’s finest liberal arts colleges. But as I work on my book about globalization and wine I’m starting to think of UPS as the University of Wine (or maybe the University of Pinot & Syrah to preserve the UPS acronym).

It’s not that we teach a lot of classes on wine or winemaking (the course I will teach next fall will be the first), it’s just that so many of our graduates end up making wine, selling it, or telling stories about it. Must be something in the water … or in the wine. Herewith a selected list of alumni wine people.

As you might expect, wine research is filled with good experiences. One of the unexpected pleasures has been the opportunity to reconnect with exceptional alumni and former students who are in the business.

People often ask me why I write about wine and I usually say that it is hard not to want to know more about wine because it’s just so darn interesting.I then admit a secondary motive: it’s a good market for me.I think there are many people who would not read a book about economics or globalization who might read one about wine economics or wine globalization because they find wine, well, just so darn interesting.

This leads to the obvious question: what is it about wine that fascinates? It is a simple product, after all, just fermented grape juice. Been around for ages. What’s the big deal? For that question I have a simple answer: wine is sensuous and we live in times when sensuality is much sought after.

The act of drinking wine famously involves all our physical senses.To appreciate wine we have to admire the beautiful color (sight), breathe in the aroma (smell), appreciate its texture (touch) and flavors (taste). Sound is the only sense missing from list, which we remedy by touching glasses in a toast. Cheers!

But wine’s sensuality is more than physical. The five physical senses are just the beginning.Wine fascinates because it stimulates to our sense of history, for example, which connects us to people in the past and makes us think about the future.

Wine appeals to our sense of place, too, since it is something that we associate with a particular time and location, often with more meaning and precision than other products of daily consumption.

Wine is a natural product, its variations arising from forces beyond human control.It can also be a personal product, revealing a particular winemaker’s artful expression or a wine drinkers sense of taste.

Wine appeals to our sense of wonder, since we never really know what is inside the bottle until we open it, and our sense of humor, because we are so often surprised by what we taste. Importantly, it informs our sense of self. I find that many of my friends express their identities in part through their relationship with wine.My newspaper editor friend David Seago recently told me that “you need a good vocabulary” to appreciate a particular wine, a statement that told me that he was enjoying the interplay of wine, language, and an active imagination, which is a seriously sensual mix. The imagination is after all the most sensuous organ in the body.

In short, wine is a simple product with a complicated social role. We use it to stimulate the senses we value most.No wonder it’s so darn interesting.

I’m in Oregon interviewing winemakers this week (watch for a posting about this soon) and I received an email from Kate Palmer of Foreign Policy magazine asking if I would be willing to be interviewed about global wine market conditions for their popular “Seven Questions” series. You can find the interview at www.foreignpolicy.com. Now back to the vineyards …

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The Wine Economist

What would you get if you crossed the Wine Spectator, America's best-selling wine magazine, with the Economist, the world's leading business weekly? The answer is this blog, The Wine Economist, which analyzes and interprets today's global wine markets. The Wine Economist was named 2015 "Best in the World" wine blog by Gourmand International. Staff: Mike Veseth (editor-in-chief) & Sue Veseth (contributing editor).